Monday, 10 September 2012

German Court Decision on Bailout Fund Looms Over Euro Crisis

By Patrick Donahue - Sep 10, 2012 11:47 AM GMT+0400

Hannelore Foerster/Bloomberg

A euro sign sculpture is seen outside the European Central Bank headquarters in Frankfurt.

Germany’s high court decides the fate of Europe’s bailout this week when it judges the viability of the single currency’s emergency fund, after the European Central Bank pledged unlimited funding to overcome the crisis.

A euro sign sculpture is seen illuminated at night outside the European Central Bank's (ECB) headquarters in Frankfurt. Photographer: Hannelore Foerster/Bloomberg

The Federal Constitutional Court in Karlsruhe will issue a decision on whether to suspend the 500 billion-euro ($639 billion) European Stability Mechanism on Sept. 12, nine weeks after hearing arguments challenging the fund. The ESM would work in tandem with the ECB in buying bonds to lower yields for indebted states, including Spain and Italy.

In a week of activity that may determine the future course of the three-year-old crisis, the court’s decision comes on the same day as Dutch voters decide whether to back parties questioning an expansion of European powers, and before euro finance ministers plan the bloc’s next steps in Cyprus on Sept. 14. A court rejection of the ESM could disrupt months of European diplomacy, and investors will also pay close attention to any conditions attached.

“I think the court will say this is something that Germany can manage,” Clemens Fuest, an economist at Oxford University’s Said Business School, said in a phone interview. Still, the court will likely take an interest in parliamentary involvement and “impose some conditions” on the ESM.

ECB President Mario Draghi’s bond-purchase plan sent Spanish 10-year yields down the most in a week since the euro’s inception and prompted a rally in the single currency to the highest level since May. Spain’s 10-year yield slid 1.2 percentage points to 5.63 percent last week, trading at 5.67 percent at 8:52 a.m. in Madrid. The euro, which jumped almost 2 percent to $1.2816, slid back to $1.2778 today.

Injunction Sought

The German judges heard oral arguments on July 10 from groups challenging the viability of the euro’s fiscal pact and the ESM, which both houses of parliament approved with two- thirds majorities on June 29. The complaints by a group of lawmakers, academics and political groups sought an injunction against the law while the court reviews the cases in detail.

The challengers argue that the crisis-fighting legislation transfers constitutionally mandated authority from German lawmakers to Brussels and undermines democratic rule.

One plaintiff, Peter Gauweiler, a Bavarian lawmaker in Chancellor Angela Merkel’s ruling bloc, issued a new fast-track request for an injunction with the court yesterday seeking to delay the ESM decision, according to a statement on his website. The ECB’s bond-buying pledge has “fundamentally changed” the situation and the bank must withdraw its “undemocratic, self- appointed right” to become Europe’s “hyper-rescue fund.”

Permanent Fund

Merkel and German Finance Minister Wolfgang Schaeuble have expressed their confidence that the ESM will survive the constitutional test, as officials voiced greater concern over the details of the court’s ruling rather than the possibility of an outright rejection of the permanent bailout fund.

“There will be also conditionalities for us politicians,” Michael Fuchs, a deputy parliamentary caucus leader in Merkel’s bloc, told Bloomberg Television Sept. 5. “They will give us some conditions under which we can form the ESM.”

The ECB’s plan last week took some of the onus off the court, since the euro area would still have recourse to the temporary European Financial Stability Facility and ECB funding if the ESM is delayed or scrapped, according to Fuest, who sits on an advisory panel for the German Finance Ministry.

“The world has suddenly changed after the announcement of this bond-buying plan,” Fuest said.

Spanish Request

Italy and Spain maintained their resistance to requesting bailout aid last week, though Italian Prime Minister Mario Monti showcased the new ECB operation as easing the stigma of seeking help. His Spanish counterpart, Mariano Rajoy, said he wanted to study the details of the program.

Spain is likely to seek assistance in the coming weeks, Der Spiegel reported, citing unidentified officials in the European Commission. The ECB’s plan places conditions on countries who want to participate in the bond-purchase operations.

ECB policy makers agreed to unlimited buying as a way to wrest control over rising borrowing costs driven by speculation that the currency could split up. Only Germany’s Bundesbank dissented, issuing a statement after the Sept. 6 decision that the plan was “tantamount to financing governments by printing banknotes.”

The program also sparked outrage in the German media, with Bild calling it a “black day” for the currency and the Frankfurter Allgemeine Zeitung declaring the end of the separation between fiscal and monetary policy.

Dutch Vote

In the Netherlands, politicians were jostling for position as polls showed that the five parties that signed an austerity agreement under caretaker Prime Minister Mark Rutte won’t get enough backing for a new majority. The Dutch Labor Party, which wants more time for the country to meet budget targets, has caught up with Rutte’s Liberal Party ahead of this week’s election, according to a poll taken by Ipsos Synovate.

In Greece, government officials met with inspectors from the country’s troika of international creditors, the European Commission, the ECB and the International Monetary Fund. Finance Minister Yannis Stournaras said talks began in a “good climate” and the troika sought more detail on some of the 11.5 billion euros of spending cuts for the next two years.

“We are at the beginning,” Stournaras told reporters at the conclusion of the meeting in Athensyesterday.

Cyprus Meeting

After the court’s decision is announced, euro-area finance ministers meet Cyprus to discuss the details of the next crisis moves, including the formation of a so-called banking union and new ECB powers.

Public skepticism about deeper European integration is undermining the progress leaders have made fighting the debt crisis, Monti told reporters over the weekend in Cernobbio, Italy. He said the push to strengthen ties in the 27-nation EU is threatened by insulting stereotypes and nationalist rhetoric.

“One can’t help note a growing and dangerous sentiment of antagonism in member states,” Monti said. “It’s paradoxical and sad.”

Meanwhile, billionaire George Soros took aim at Germany’s political establishment.

“The best course of action is to persuade Germany to choose between becoming a more benevolent hegemon, or leading nation, or leaving the euro,” Soros wrote in the New YorkReview of Books. “In other words, Germany must lead or leave.”